Easy Power Electrical Central (EPC)

Business' History

Chen Wha, 57, was the sole proprietor of Easy Power Electrical Central (EPC) in Sungai Petani, Kedah. EPC was established as a partnership in 1975 by Chen Wha, his father Kwang and his brother Seng. EPC was the first electrical shop to provide professional wiring services, light installation, and trouble shooting for manufacturing plants and residential houses in Sungai Petani, Kedah. EPC also sold electrical items, such as generator motors, pump motors, lighting and fans.

They had only minor competition from 1975 until 1988, and during this period enjoyed good profits. Consequently, they expanded their business and employed ten (10) electrical supervisors, sixteen (16) electrical technicians, one (1) clerk, and Chen Wah's sister in-law as a manager in 1988.

Problems started after Chen Wha's father passed away in 1990. Many electrical supervisors and electrical technicians left the company and formed their own sole proprietorship, directly competing with EPC. The situation became worse when supervisors and technicians managed to attract some of EPC's customers by offering cheaper service charges.

Chen Wha and his brother Seng, continued to run the business operations, but they faced a very serious economic crisis, as did other Malaysian businesses. During the period 1997-1999 the company ran into significant financial trouble. Many of the company's debtors faced insolvency, which resulted in a huge increase in debt and a huge decrease in revenue. However, EPC enjoyed profitability by year 2000, and this continued until 2008 and 2009, when the company once again relied on overdrafts, as they had from 1997.

In February 2009, Chen Wha's brother decided to quit the business, and Chen Wha used bank overdraft of RM250,000 to buy him out. Afterward, Seng formed another sole proprietorship namely Easy Power Excellent Electrical (EPEE) and brought with him the main customers of EPC. It is important to note that once his brother left EPC, that business became a sole proprietorship fully owned by Chen Wha. Asa result, Chen Wha had unlimited personal liability and faced business risks. Indeed, his entire financial future was in jeopardy.

EPC's business units consisted of a unit for professional wiring service, one for installation of electrical and electronic parts, one for repairs and maintenance of motors, to deal with Tenaga Nasional Berhad (TNB), one for retail electronic and electrical items, and one to troubleshoot electrical problems. To handle all of this Chen Wha employed two (2) local workers, three (3) foreign electrical technicians, one (1) general worker, his eldest son namely Tong as an electrical supervisors, his daughter namely Kim as a clerk and his other son namely Guang as a manager.

The organization chart of EPC of February 2012 is as follows:

Owner's Background

Chen Wha's education did not extend beyond secondary school. And his knowledge of financial matters was very limited. He lost approximately RM100,000 which is nearly his entire savings in 1997 because after receiving a tip from a friend to buy shares of a company without analyzing the company's fundamentals. The company on which he gambled eventually fell into PN-17 and was de-listed.

According to Kim (clerk), Chen Wha owned a current account under his name and saved in that account even though it did not yield any interest. EPC is having an overdraft facility. Furthermore, Chen Wha did not understand how to calculate the profitability from the business' transactions after the deduction of all relevant costs.

Management and daily operations

Guang who is Chen Wha's son was named manager at age nineteen, one year after completing his SPM exams. He had no prior working experience and possessed only limited fluency in English and Malay. However, he proved to be a very hard worker and displayed good social skills.

On 17 March 2009, one month after Chen Wha took over EPC, Guang approached him with a very serious question: "Dad, after paying RM250,000 to my uncle, we are almost out of funds. How are we going to survive, since we need to pay cash for raw materials and can collect only after jobs are completed?"

Guang also inquired about the mechanics of pricing (e.g. how to identify whether a given price is enough to cover costs). He learned from his father that it is possible to collect early payments by giving customers discounts.

Chen Wha explained how this worked in the past: "Normally (technician clerk) Shin Tian will summarize the cost of materials and I will charge an extra 30-80% on it. Charges for installation and troubleshooting are based on job difficulty and the time it takes to complete. If a customer complains about the price I offer, I will give a 5-10% discount on the total amount. Even when we give customers 5-10% discounts we still earn some profit, because the offered price is still higher than the cost of materials. And if we are able to give a customer a discount, we could end up retaining a customer. We also might give a customer another 2-3% discount, if the customer is willing to pay cash. The objective is to encourage customers to pay cash. Otherwise they must pay within sixty days of the signed Job Delivery (JD)."

Then Chen Wha explained further: "After we get the job, we will assign manpower to it. If something else is needed to continue the work, they either go to EPC directly or go to the supplier. After the job is completed, they will go back to EPC and report what they have done, and everything will be recorded by the clerk in the signed JD. They need to send the JD to get the customer's signature, after which the payment will be made."

Chen Wha then discussed rate variations among customers: "There are different charges for different customers. We charge only 5% more than the total of material sand contract-worker wages for new housing-development projects. A standard rate is given to manufacturing plants and regular customers. A higher rate or a flat rate is charged to walk-in customers, because a majority of these customers will ask for some electrical installation. When quoting prices, it is a must to refer to the historical prices first. Charges should not be much different compared to those given historically."

Guang then asked: "Where should we find the customers?"

Chen Wha's answer was this: "So far we have not done any promotions in any channel; we are the first electrical shop in Sungai Petani, and we are well-known. If we are able to provide good job-quality and competitive prices, customers will look for us in the future. However, you must try your best to find new customers, since we have already lost some of our existing customers, to our competitors."

Guang then asked: "Then how many customers, or how much in sales, do I need in order for the company to survive? What are our average sales in a month?" Chen Wha replied that "Well, you don't need to care about the minimum sales needed to break even; just try your best to find new customers. We don't have any targets or budgets, either monthly or yearly. You may, however, ask Shin Tian, if you want to know more about monthly sales."

Accounting

Shin Tian and Kim are clerks who assisted Chen Wha in managing the company's accounting. Shin Tian had more than ten years' experience in accounting for enterprise, and four years' working experience with EPC. However, Chen Wha's daughter who was seventeen has just finished her SPM and she was only able to record accounting data and do simple documentation.

Shin Tian and Kim keyed into UBS accounting system all accounting data and process the data for accounts receivable, customers' monthly statements, financial reports, and other accounting reports. But because EPC workers lack sufficient accounting knowledge, the annual financial report was outsourced to an accounting firm, in order to minimize the company's tax liability.

On 26 April 2012, Shin Tian and Kim did the monthly closing, and printing customers' monthly statements. They also prepared Chen Wha's income tax declaration.

During all of this Kim asked: "Shin Tian, why do we need to install this UBS accounting system, which costs RM12,000 instead of recording manually by using Microsoft Excel?"

Shin Tian replied: "Although installation of UBS is costly, it is the most popular accounting software in Malaysia, and is famous for easy-to-use features and great flexibility. Furthermore, it comes with UBS Assets Register, which is a handy tool for managing the fixed assets and calculating depreciation. It helps a lot in generating reports for our income tax agent and with monthly closings."

Kim then inquired: "What we will do with the report generated by using UBS-and why we still need to appoint the income tax agent to declare my dad's income tax, since we are able to prepare financial reports?"

Shin Tian offered the following response: "Normally, generated monthly reports are kept on file. We appointed an income tax agent because neither Chen Wha nor I are familiar with income tax regulations and I'm not strong in accounting. My highest education is SPM level, and I am unable to do the analyses on financial reports."

Kim then asked: "Shin Tian, why we made a profit in March 2012, is EPC's OD still increasing? And why does the account show my father's personal account as EPC current asset?"

Shin Tian laughed and replied: "This is a sensitive question. "Did you notice the cash withdrawals amounting to RM5500 on 21 March? Actually, it was withdrawn by your father due to his high commitments. Furthermore, he used the OD in EPC to pay RM250,000 to your uncle, when he left the business. This is the reason you saw his personal account listed as an EPC current asset. To a certain extent, your father is an EPC debtor."

Kim thought about this and asked: "Since my father's personal current account has some money, why doesn't he want to transfer the money to lessen EPC's OD, in order to reduce the interest? The monthly interest is about RM2300."

Shin Tian then explained: "The Bank has revised the interest rate based on the recent negotiation between the Bank and Chen Wha. Regarding why Chen Wha does not want to transfer money from his current account to reduce the interest, that is a personal matter, and I am not in a position to give any advice. He is a sole proprietor. He is legally withdrawing the money from EPC although it results in high interest and a tight cash flow."

The overdraft line of RM350,000 was obtained from RHB Bank with a mortgage of EPC's premise of RM200,000 in 1997.

The summarized income statement and balance sheets for EPC for 2009, 2010, and 2011 are shown in Table 1 and Table 2.

Table 1: Income Statement of EPC for year ended 31 December 2009-2011

Items

2009

2010

2011

RM

RM

RM

RM

RM

RM

Revenue

1,055,671

1,153,072

839,691

Opening stock

40,510

32,500

35,000

Purchases

381,603

593,589

503,824

Closing stock

(32,500)

389,613

(35,000)

591,089

(34,500)

504,324

Gross profit

666,058

561,983

335,367

Other income

-

-

158,450

666,058

561,983

493,817

Expenses:

Advertisement

-

100

789

Accounting fee

560

480

480

Allowance & overtime

20,457

21,369

18,735

Bank charge

287

140

119

Bank interest

21,869

14,380

23,157

Bonus

11,800

17,400

5,560

Contract wages

297,252

190,681

153,579

Depreciation

23,927

12,833

10,768

Donation

200

-

-

Electricity and water

12,722

2,552

9,441

EPF

11,580

14,257

13,300

Food allowance

240

1,660

2,788

Foreign workers levy

1,250

3,400

-

Handling charge

35

-

130

Insurance

886

886

886

Interest (Finance)

5,092

4,365

2,100

Late charges

-

1,344

-

Licences

-

930

-

Medical

1,614

2,285

3,012

Newspaper

444

413

341

Office expenses

-

430

108

Petrol

21,425

10,513

15,296

Quit rent & assessment

885

835

833

Road tax & insurance

4,063

6,670

4,137

Repair & maintenance

18,018

13,114

16,229

Rental (hostel)

1,800

1,950

980

Stationery & printing

1,234

1,886

404

Socso

2,635

3,246

2,218

Sundry wages

5,100

1,600

600

Salary (owner)

54,000

60,000

60,000

Salary (employee)

154,805

160,170

148,496

Transportation

3,568

61

56

Telephone expenses

9,755

5,355

6,962

Uniform for workers

-

-

600

Upkeep expenses

-

-

738

Workers' accommodation

-

687,503

2,880

558,185

-

502,842

Net profit / (loss)

(21,445)

3,799

(9,025)

Table 2: Balance Sheet of EPC for year ended 31 December 2009-2011

Items

2009

2010

2011

RM

RM

RM

RM

RM

RM

Net Current Assets

405,605

397,351

393,741

Current Assets

Closing stock

32,500

35,000

34,500

Deposit

1,143

1,143

1,143

Bank

119

119

119

Trade debtors

612,022

668,098

624,973

Sundry debtors

24,928

22,665

23,830

Personal current account

314,836

122,434

100,793

Cash in hand

81

985,629

301

849,760

1,215

786,574

1,391,234

1,247,111

1,180,315

Current Liabilities

Accruals

11,026

20,849

77,126

Trade creditors

621,669

569,724

502,362

Bank overdraft

206,352

263,162

230,522

Sundry creditors

179,475

36,278

36,305

Car loan

61,056

1,079,578

41,643

931,656

31,634

877,949

Owner Capital

Capital

500,000

500,000

500,000

Accumulated losses

(166,899)

(188,344)

(184,545)

Current year's profit/ loss

(21,445)

(188,344)

3,799

(184,545)

(9,025)

(193,570)

Drawings

-

-

(4,064)

1,391,234

1,247,111

1,180,315

Guang identified a declining trend with trade creditors, with no significant changes to its trade debtors. He felt Chen Wha was too kind to his trade debtors. Thus, he printed out the Top 7 EPC debtors, shown on Table 3. He was shocked when he saw the total debt of RM437,989.99 which not been paid for more than two years.

Table 3: EPC Top 7 Debtors as of 31 December 2011

No

Company

Outstanding (RM)

1

Manichi Electronic (M) Sdn Bhd

17,680.00

2

Earn Extra Sdn Bhd

297,828.63

3

Winners Fibres Industries Sdn Bhd

40,365.01

4

Legend Developer Sdn Bhd

20,544.75

5

Kacang Putih Sdn Bhd

25,571.60

6

Pembinaan Bumi (S) Sdn Bhd

21,950.00

7

Sivarajan Construction Sdn Bhd

14,050.00

Total

437,989.99

Staff

EPC provided professional electrical services. Most of the time, the electrical supervisors and technicians worked in the clients' premises. This had been a challenge for Guang to manage and supervise on employee performance.

Sometimes he did spot-checks and found that two employees were not in their working areas during their working hours and the next working day. The employees both claimed two hours' overtime pay. This made Guang very angry, and he reduced the overtime pay for the two employees, for that particular month, and followed by punishing all employee by not allow overtime from then onward.

Over the next three months employees frequently appealed to Chen Wha as the overtime pay-cut significantly affected their income. Chen Wha allowed employees to claim overtime again.

Additionally, some employee had been caught doing personal things during working hours (e.g. bank transactions, shopping, resting at mamak restaurants, staying home, etc.). Once they were caught, the employee would have plenty of excuses, and most of the time they had only been warned.

Furthermore, some employees accepted jobs from customers privately by offering them cheaper rates. This directly injured the company and was illegal. The employees, when caught, argued that they did such things only after their working hours, and that the company should not interrupt their dealings. As a result, some customers would not deal with EPC, as they preferred cheaper charges over ethical behavior.

Again, Guang felt that he had to do something to stop this kind of behavior. He went to Chen Wha with the report which showed the salary structure and job descriptions as in Table 5.

He said: "Dad, we have to do something. Yesterday I met Azlan in Ambank at 10.30 a.m. he was doing some kind of bank transaction. But I called him fifteen minutes earlier. And he told me he was troubleshooting in Hai Tong Sdn Bhd which is more than ten kilometers from the bank. He was cheating the company."

He continued: "Also, I saw terry last Wednesday at 5 p.m. on the way back to his house on a bicycle, but the next day he reported that he did three hours' overtime. They lie to me and they cheat the company! We must do something to control this situation. What can we do to punish them and stop this from happening?"

Chen Wha replied: "How come this happened again? I already told them to be hard working, and that I will reward them big better bonuses. The only thing we can do is spot-check more frequently. We can do nothing else because we cannot afford to lose any one of them. Also, you inform Terry that his overtime for this month will be fully deducted."

Guang concluded: "I understand that overseeing employee performance is part of my job, and I think that current system is not sufficient to improve performance and progress. Currently we have a kind of unofficial 'reward system'. The year-end bonuses are already a reward system; if we have another reward system it will incur extra cost. I understand you are trying to help the company, but the employees will only try their best to take advantage of us. Furthermore, I know that some of them have accepted private jobs from our customers. So I don't think now is the time to increase employee benefits."

Bonus

On 7 February 2012, one week before Chinese New Year, Chen Wha decided to give bonuses to his employees. After arriving at work one hour early that day, he went through the bank account record sand was shocked to learn that the account balance was -RM338,000 (negative balance) which is very close to his overdraft limit of RM350,000. At same time, he noticed that some utility bills and bank instalments were not yet paid. Chen then said to himself: "Oh no! How can this happen? If I don't pay bonuses, many employees will surely leave the company. Oh God. Please help me, I can't let EPC collapse."

a) Identify problem statements

b) Evaluate Easy Power Electrical Central (EPC)'s current business using SWOT analysis.